Are you an investor in the freight industry? Then freight load factoring could be everything you have been looking for to ensure maximum convenience in your trucking venture.
This factoring has emerged as a popular strategy used by trucking companies and owner-operators to minimize income or cash flow gaps. However, many businesses and truck operators still lack proper knowledge concerning what it is and how precisely it works.
Here’s the complete guide on freight load factoring and how trucking businesses can embrace it to foster success in their operations.
What is Freight Load Factoring with The Right Companies?
Also known as freight bill factoring, it is a financial solution that involves selling a trucking organization’s load invoices. The expectation is that the company will pay it either on the same or the next day.
In essence, it allows the trucking organization to access its funds early enough through a factoring company. Instead of waiting for 30 days for the customer, the company releases the cash within 24 hours. As such, this factoring allows the trucking company to access immediate cash flow and haul volumes of goods as it catapults its growth curve.
The hauling venture is indeed by no means an easy job. However, the principle used by hauliers to make money is a little bit simple, the client orders for their cargo to be delivered, and the trucking company charges the customer. The payments made minus the total cost of haulage equals the trucking company’s profit.
Though simple, the process is marred because while the client makes the payments almost immediately, the industry operates under specific strict standards that impose a 30-40 days hold on the amount transacted before processing the payouts to the trucking companies and drivers.
While the standards are meant to foster secure operations in the industry, they may impose many budgetary constraints on the company. This reveals why most trucking ventures resort to this factoring with companies like ezfreightfactoring.com to make ends meet.
Previously, most haulage businesses sought assistance from banking institutions regarding credit cards and loans to ensure that they remain afloat when the amounts cashed out superseded the “pay-ins” on their balance sheets. However, banks were derailing and imposed colossal interest rates. This reveals why it remained the only refuge source for haulage ventures that needed quick cash to foresee their operations moving.
How Does the Freight Load Factoring Process Work?
The trucking industry runs on heavy financial investments. This reveals how crucial it is to access the desired finances early enough to successfully operationalize a trucking venture. Factoring comes as the most incredible saviour for trucking businesses that want to go beyond the set industrial standards by offering seamless services through timely access to the capital needed to keep the business running.
The process isn’t as hard as you may think. Instead, it involves a haulage company selling its invoice to the factoring company in the bid to get access to early financing opportunities. In this case, the company pays immediately for the invoices (at a fee) to allow the haulage company to access the necessary finances.
Critically speaking, the freight company in the process clinches on the immediate payments (rather than the long waits) as its strong incentive. On the other hand, the company greatly depends on the leave out (percentage charged) attributed to the invoice, which later translates to a percentage gain when it later collects the agreed amount from the end customer.
Comparatively, the customer benefits from the transactions made in the freight load factoring venture by dealing with the firm that has established the necessary collateral to remain patient.
That is until the payout is made rather than dealing with a small, inefficient freighter that will always ask questions while pressing for payments. The factoring may either take single instalment transactions or two instalments, as highlighted below.
Single Installment Factoring Transactions
Single instalment deals are the most common and the simplest forms of charging applied in the factoring business. However, they are highly dominant among the upcoming and small-scale haulage companies.
In this case, the company accords the freighter a single payment referred to as a “full advance”. In most cases, single instalment plans are initiated with a flat rate fee that ranges between 95% and 98.5% of the total amount charged by the freighter on the invoice.
The factor may deposit the advances to the haulage company’s fuel card or bank account upon completing the necessary procedures. The remaining percentage is treated as a fee for services offered by the factor.
Double Installment Factoring Transactions
Double instalment transactions take precedence among most established freight companies, usually the mid-sized and the larger carriers. In this case, the factor splits the amount charged on the invoice into two instalments.
In the first instalment (also known as the advance), one sees specific progress. The company is paid between 90% and 95% of the value of the invoice it has charged its customers. The amount is deposited in the freight company’s financial accounts one business day after the invoice has been submitted.
On the other hand, the factor waits for the shipper to make payments of the total invoice then releases the remaining amount, less the factoring fee charged. In essence, most of the double instalment transactions will have a lower per dollar cost than the single instalment transactions.
What A Freight Factoring Company Does
The company is principally meant to buy control of the trucking company’s accounts receivables. In essence, the company purchases the accounts receivable of the trucking organization either partially or fully and waits for the client to clear the bill as agreed in the original haulage contract.
The company works to ensure that the haulage company receives the percentage of the invoiced amount within one or two days. Similarly, the factor will be faced with the obligations of handling the entire invoicing procedure, the billing, and collecting the attributed sum from the client.
The factor frees the haulage company from the burdens associated with following the customer to initiate payments and possible losses if the customer declines to pay as the factor is meant to absorb the loss.
What Stipulations Does A Business Need to Meet to Qualify for Freight Factoring?
Not all haulage businesses qualify for these types of services. There’s a list of needs that the business must meet to be eligible for funding from the factoring organization. Here’s the list of stipulations that a business needs to meet to be eligible for freight factoring.
Application for factoring
The application shows the service provider’s will to seek the services of the organization. This is where the two entities establish a meeting point and proper awareness of one another’s details. The factor will ask for the haulage company’s contacts, invoicing volume per month and other essential information necessary for a fruitful relationship.
Availability of accounts receivable ageing report
This is the list of all unpaid invoices notes by date and credit memos under the control of the freight company. The factor will use this as a basis for vetting the strength of the business relationship that will be established.
Articles of incorporation
This document proves that the entity seeking invoice factoring services is quite certainly a legally registered business. The haulage company should avail a copy of its articles of incorporation to be considered for factoring.
The invoices to be factored
The freight company must prove that it has unpaid invoices to qualify for invoice factoring. In essence, unpaid invoices are the essential documents that form the foundation of the relationship established between the factor and the haulier.
Proof that the targeted clients are creditworthy
Having a creditworthy customer is a vital issue when a freight company approaches the factor. No one wants to deal with stubborn clients in matters of payment. The freight business must uphold the fact that the funding does not depend on its strength in the industry but the nature of the invoiced client.
Having significant creditworthy customers could be one of the surest ways of accessing the funds desired by the freight business. In particular, the freight company gets a higher credit rating any time they present a customer that has been in the industry for a long or is a household name.
The factor firm must conduct a thorough vetting process to ensure that the money rendered doesn’t end up in the wrong hands. Specific legal documentation will be required from the freight company when the factor starts conducting due diligence. The documents will include the elements present below.
Official business bank account- It is a standard requirement for companies to rule out issuing cash or transferring money to personal bank accounts as methods of making payments.
The transport company must present a business-only bank account to succeed in this process. Tax identification number- The freighter must present a copy of the original government-issued tax ID number.
Focus on the Fundamentals in Transportation
These are the various aspects that you must know when you are thinking about companies and their value in transportation. Now that you know more about how it works, you can find out how it can be helpful in your business.